Demonetisation is a big reform in a country like India where things usually move slowly believes Hugh Young, Managing Director at Aberdeen Asset Management Asia
Although the surprise move did lead to a lot of confusion, it shows a strong commitment to reforms. It is definitely an important signal and overseas investors have read it positively. However, one is keen to see more such reforms. Goods and Services Tax (GST) would be a long-term positive if implemented properly, says Young in an interview to CNBC-TV18.
He is not too worried about the price corrections seen in emerging markets, in fact sees them as an opportunity to buy and not a threat. However, he would keenly watch Donald Trump's policies to assess the impact on investments in the emerging markets.
While fundamentals of most EMs are strong as of now, global economy still remains weak. Young believes though there are reasons to be cautious, one can look at good opportunities by being selective.
The basic theme of Aberdeen has been to look at companies where balance sheets are rock solid. Therefore, in India we have stuck to our long-term investments in TCS, HDFC Bank, Kotak Mahindra Bank, says Young.
Talking about Tata's boardroom battle, he says foreign investors are as much amazed as domestic because Tata has been an icon of Indian business.
Among other Indian investments, he is happy with exposure to Grasim and Ultratech and expects plenty of upside for them. In the auto space Aberdeen has exposure to Bosch and Hero MotoCorp. Although Bosch remains an incredibly strong business, valuations are a bit of a concern, Young says, adding, Hero has managed do well post their split with Honda.
Asia expert Hugh Young has more than 20 years of experience in fund management and he aims to identify undervalued investment opportunities through detailed company analysis.
Aberdeen globally manages over USD 400 billion in assets.
Below is the verbatim transcript of Hugh Young’s interview to Latha Venkatesh, Anuj Singhal and Sonia Shenoy on CNBC-TV18.
Anuj: The Indian market has seen a lot of volatility. Emerging markets have also seen some underperformance post a Trump win. Are you viewing this as a great buying opportunity or do you see more pain for emerging markets like India?
A: In part, it is a buying opportunity although of course, the broader emerging market falls have been relatively small compared to what we have seen in the past, so we are still not quite champing at the bit and pouring all our money in, but we are not too worried yet by the price falls. And as long-term investors of course, look to any price weaknesses, opportunity rather than threat. Although like the world as a whole, we are sitting back, waiting to see what Mr Trump is going to do when he ascends to the presidency next year. Whether we will see a rising tide of protectionism, rising tariffs and some of which fundamentally is not terribly good news for the world as a whole, I would argue. Certainly, not that good news for emerging markets, necessarily.
Then of course with India, we have some special circumstances with everything going on, on the demonetisation front as well as for foreign investors - one should not underestimate the effect that the changes at Tata have had on the sentiment.
Latha: Are you therefore sensing that after President Elect becomes President? The rotation of money away from emerging markets (EM) to developed markets (DM) will increase?
A: We are waiting to see. That has been initial knee-jerk reaction has been something that surprised most people, that has been a wave of enthusiasm for the US market itself for spending plans within the US, infrastructure building and the like and people being a little nervous about emerging markets. And this happens from time to time and vice-versa happens from time to time. The fundamentals behind emerging markets still remain as strong as ever although with the caveat of course that the world economy is far from robust that we have seen a relatively anaemic recovery in the US economy. Europe has its problems, plus of course, we have various political events going on in Europe as we speak. Short on the tail of Brexit, we have got Italy and France. So, there are lots of reasons for caution, but we still think there are some super opportunities in emerging markets. Of course, you have to be selective.
Sonia: Let us talk about some of the stocks that you have in your portfolio. A sector that you have an exposure to is the IT space in names like Infosys and Tata Consultancy Services (TCS) and we have seen a huge degree of underperformance there because of various issues like lower client spending, a higher possible visa cost post the Trump victory. Is this a space that you are still bullish on for the longer term or would you start to get a bit cautious here?
A: Again, it is a space where we are just waiting to see what measures come out of the US primarily and how that affects business. It is an area that has slowed down certainly over recent years in part due to a slowdown in financial services for example. Still, an area where I think these names, Infosys, TCS, still do a very good job, so they are world leaders in what they do and with an Indian portfolio seem clearly, something one should have in one’s portfolio to balance the largely domestic stocks that we hold elsewhere within the portfolio. So we are not uncomfortable with them, but of course, watching for any developments and things move very sharply on speculation on rumours. We will just wait and see what the facts will be.
Anuj: One of the themes that you mentioned was what is happening with the Tata Group. You have of course sizeable holdings in some of the Tata Group companies, TCS being the largest of them, how are you looking at the situation right now?
A: TCS is our only exposure to the group as a whole. The foreign community has just looked at it with as much amazement, I suspect, as the domestic Indian community because of course, Tata has a superb reputation and this is a bit of a stain on the reputation to have such a public spat between individuals. I do not think there is any, we have no doubt that anything untoward has been going on at the like of TCS which remains a well run company. But it is not a good advertisement for the poster-child of governance. So, it is a great shame, these things do happen for whatever reasons and I suppose one just has to live with it. It can happen in all sorts of circumstances, but since it was such an icon of India from a governance point of view, it will have dented people’s beliefs a little, I am afraid.
Latha: As you said you only hold Tata Consultancy Services (TCS) and that is independently run by its own management and extremely well run but if you were holding any of the other Tata companies which are in the eye of the storm or where debt is a huge problem. Would you be trimming holdings? What are you picking up from the market?
A: We have deliberately avoided some of the Tata companies, for example steel and cars. We have not been totally comfortable with a part of debt and part of overseas exposure and the risks of ventures overseas. I am afraid there was no great prescience on our part. It's just a natural quotient and conservatism and we have a tendency, you will see, right through our portfolios to stick with companies where balance sheets are rock solid. So of course our preference has been and continues to be within that stable for TCS which is head and shoulders above everything else.
Sonia: Where does India feature now in the emerging market basket over the next three-six months and has India lost some of its sheen because of the recent impact the demonetisation has had on demand especially in the consumption space?
A: In short-term it probably has lost a bit of the sheen from the demonetisation. I think for investors like us, we look beyond that. We are not investing for the next three or even six months. We are investing looking ahead years and have been investing looking ahead years in India for 20-30 years that we have been doing so and we still see tremendous potential within India. Of course, we always want to invest in it more cheaply. So we wish at times the market was at lower level, so we could put more money but of course we have enjoyed a tremendous ride over the last quarter of a century in India. We have some superb companies and we still see great potential from those companies.
Yes, the economy is not going to do that well over the next three-six months, next couple of quarters but looking ahead over the next five-ten years, we are as comfortable as we were five or ten years ago. So great opportunity for us and it's one of our biggest emerging market exposures within our emerging market funds.
Anuj: You recently added positions in Bharti Infratel on the telecom services front and booked out of Ambuja Cements. Your thoughts on these two spaces in India - cement, do you think is getting a bit over extended and telecom services, do you think is it a good point now after the stock having seen such a brutal correction?
A: I guess reasons behind it. We have got quite a bit of exposure to the cement sector. Our preferred exposure has been through the group of companies, so Grasim Industries and UltraTech Cement, who has been our long-term large exposure in cement which we still like and we still see plenty of upside there.
As far as on the telecom side, we have had pretty low exposure there and it has been a rocky area over the years. So it is just a matter of topping up gently, not necessarily a huge vote of confidence but just within the context of the portfolio given our very low exposure in telecom and that makes sense and given our very high exposure in cement because it's not just through Grasim, UltraTech that we have our exposure.
Latha: Financials, your two investments have been HDFC and Kotak Mahindra Bank and they have served you well, but would you now cast your net wider on the non-banking finance company (NBFC) space, as we call it?
A: We have preferred to concentrate on those two names. We also have HDFC Bank and ICICI Bank itself as well which at the moment suits us quite nicely. Of course, HDFC and Kotak have done exceptionally well and in all honesty, it is hard to argue that they are desperately cheap investments. But in finance in particular, we are far happier to concentrate on quality first and strength of balance sheet and loan approval processes and all those sorts of things rather than just on price because if you build a poor quality business in a highly geared financial organisation, that could be absolutely disastrous. So, I see us sticking with both HDFC and Kotak as our core holdings.
Latha: Not any of the other NBFCs?
A: Not that we have seen as yet. We always look. We are always keen on new things, of course, in portfolios but we also like to stick with those who have served us well in the past. Of course, in the expectation that they will continue to serve us well in the future and both HDFC and Kotak have certainly so far proved that to be the case. But we are always on the lookout.
Sonia: From the auto space, two stocks that you still have in your portfolio are Bosch and Hero Motocorp. They have been great wealth creators in the past but in the last two years these stocks have been absolutely flat, they have not given any returns. Why do you think that is and has the time come to churn in this space?
A: Bosch continues to be an incredibly strong business. One of the issues with Bosch has of course, been its valuation which does not leave much scope for huge appreciation in the way it is valued because it is already at a premium valuation. The underlying business is still quite a strong business. Hero, there has always been the doubt since the split with Honda over what its business would be like, but it still continued to do better than our expectations. We really did worry at the initial stages of what effect the Honda spilt would have and it still fared quite well as a fundamental business but it does have a major market share, there are lots of competitors out there trying to eat its lunch and I am afraid that is true of every business in which we invest. There are always people chasing them down and trying to do things better and cheaper.
Anuj: What about Indian healthcare stocks because that is again a space where we have seen some problems, especially those exposed to the US.
A: Yes, certainly anything to do with generics and the US can be an issue and India is one of the world’s leaders in that field. So, it is not without it problems. We do have exposure to pharmaceuticals in a variety of companies from the Suns and Lupins that we own in our portfolio and some of the more domestically focused companies such as GlaxoSmithKline Pharmaceuticals and Sanofi India.
Latha: As an important representative of the foreign investing community, how have you actually looked at this demonetisation itself? Is it reaffirmation of reform, is it just a near-term confusion or is it is slightly longer term harm for the Indian consumption story?
A: I certainly think it is the first two. Yes, there is certainly confusion and there is a bit of a hiccup as a result, but also at the same time it is a clear strong commitment to reform. There will be arguments whether that was the best way of doing such reforms or not. It was certainly amazingly well-executed in one sense and so far as nobody knew about it and it took everyone by surprise which was a good thing. Of course amazingly badly for exactly the same reasons, so it took everyone’s surprise and has caused confusion. But I think it is an important signal and as a signal, it will be read very positively from overseas, longer term although everyone is still looking for more and more reforms in India and certainly as long-term followers of India, we know these things are not easy, they take time. The value-added taxes, for example has been a long time coming. The free trade, the movement of goods across state borders, it is all slow, that is the way India works and this was certainly dramatic and shows that the government is prepared to do things. It would be nice to see some more things coming through.
Anuj: What about the GST and the impact? How are you going to play that theme in India?
A: Again, for us, we are not going to play the theme itself. But for us GST or value-added tax for us is a long-term positive for the country as a whole, if it is properly done. So, it is not so much playing that specific theme, but more giving us confidence that India is making the reforms necessary to have a better, hopefully fairer economy as a whole which is going to be good for all the things that we do India.
Sonia: One sector that has done exceptionally well this year is the metals space, the commodity space. But, not too many people have really caught that rally. Would you be looking at any of the commodity stocks in the Indian markets at least?
A: We do not have an exposure and it is probably too cyclical for us and I understand why it has had a rally and indeed we have seen very strong rallies in similar stocks worldwide in large part because they were so beaten down in previous years, so it has been pretty much a relief rally, but whether that continues or not it very debateable. And certainly from a point of view of quality that we are looking for and the long-term visibility, it's not a sector that immediately attracts us.
Latha: How much are you in cash, especially in India funds. I am trying to gauge how much do you anticipate things can fall so that you buy cheap?
A: In our own dedicated India funds, we run three-four closed-end and we run the India fund, for example, listed in New York and a fund Aberdeen New India, listed in London. Typically, we do not run big cash levels because they are there to invest in India. So, we are not taking that decision within the portfolio itself and typically run just residual cash of a few percent. So, in our dedicated India funds, the answer is we do not have that much cash free to add, 1 or 2 percent typically. Of course, we can have cash flows coming into those funds if people get enthusiastic about India or vice-versa cash coming out. But we also have large emerging market funds of USD 20-30 billion worth of emerging market funds that can alter their exposure to India. So that would be the likely source, if we were positive or indeed negative on India, that would be from asset allocation whether in our emerging market or Asia-pacific portfolios.